SFAS 123(R) requires us to estimate the cost of certain forms of share-based compensation, including employee stock options and awards under our employee stock purchase plan (ESPP Plan), and to record a commensurate expense in our income statement. Share-based compensation expense is a non-cash expense that varies in amount from period to period and is affected by market forces that are difficult to predict and are not within the control of management, such as the price of our common stock. Our sale of Fab 3 in Puyallup, Washington is a one-time event in our business. Accordingly, management excludes these items from its internal operating forecasts and models.

We are using non-GAAP profit, non-GAAP research and development expenses, non-GAAP selling, general and administration expenses, non-GAAP operating income, non-GAAP net income, and non-GAAP diluted earnings per share, which excludes share-based compensation expense and our sale of Fab 3 in the second quarter of fiscal 2008, to permit additional analysis of our performance. Management believes these non-GAAP measures are useful to investors because they enhance the understanding of our historical financial performance and comparability between periods. Many of our investors have requested that we disclose this non-GAAP information because they believe it is useful in understanding our performance as it excludes non-cash and other special charges that many investors feel may obscure our true operating costs. Management uses these non-GAAP measures to manage and assess the profitability of its business. Specifically, we do not consider share-based compensation expense when developing and monitoring budgets and spending. The economic substance behind our decision to exclude share-based compensation relates to these charges being non-cash in nature. The exclusion of our sale of Fab 3 in our non-GAAP disclosures is based on the one-time nature of this event. Our determination of the above non-GAAP measures might not be the same as similarly titled measures used by other companies, and it should not be construed as a substitute for gross margin; research and development expenses; selling, general and administrative expenses; operating income; net income and diluted earnings per share determined in accordance with GAAP. There are limitations associated with using non-GAAP measures, including that they exclude financial information that some may consider important in evaluating our performance. Management compensates for this by presenting information on both a GAAP and non-GAAP basis for investors and providing reconciliations of the GAAP and non-GAAP results.

MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per share amounts)

Three Months Ended
September 30,

Six Months Ended
September 30,

2008

2007

2008

2007

Net sales

$

269,706

$

258,647

$

537,878

$

522,719

Cost of sales

105,553

103,935

210,128

209,462

Gross profit

164,153

154,712

327,750

313,257

Operating expenses:

Research and development

31,343

29,306

62,895

59,052

Selling, general and administrative

45,629

42,969

91,042

86,749

Special charge – sale of Fab 3

-

26,763

-

26,763

76,972

99,038

153,937

172,564

Operating income

87,181

55,674

173,813

140,693

Other income, net

6,241

14,470

12,784

30,194

Income before income taxes

93,422

70,144

186,597

170,887

Income taxes

16,910

9,465

33,775

29,915

Net income

$

76,512

$

60,679

$

152,822

$

140,972

Basic net income per share

$

0.42

$

0.28

$

0.83

$

0.65

Diluted net income per share

$

0.41

$

0.27

$

0.81

$

0.63

Basic shares used in calculation

183,615

216,797

184,139

217,432

Diluted shares used in calculation

187,936

222,004

189,493

222,806

MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

ASSETS

September 30,
2008

March 31,
2008

(Unaudited)

Cash and short-term investments

$

1,108,415

$

1,324,790

Accounts receivable, net

120,888

138,319

Inventories

126,835

124,483

Other current assets

130,422

130,138

Total current assets

1,486,560

1,717,730

Property, plant & equipment, net

543,122

522,305

Long-term investments

411,281

194,274

Other assets

76,021

77,998

Total assets

$

2,516,984

$

2,512,307

LIABILITIES AND STOCKHOLDERS ’ EQUITY

Accounts payable and other accrued liabilities

$

117,972

$

95,640

Deferred income on shipments to distributors

103,507

95,441

Total current liabilities

221,479

191,081

Convertible debentures

1,149,504

1,150,128

Long-term income tax payable

122,830

112,311

Deferred tax liability

32,941

21,460

Other long-term liabilities

1,062

1,104

Stockholders' equity

989,168

1,036,223

Total liabilities and stockholders' equity

$

2,516,984

$

2,512,307

MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP MEASURES

(Unaudited)

(in thousands except per share amounts and percentages)

RECONCILIATION OF GROSS PROFIT TO NON-GAAP GROSS PROFIT

Three Months Ended
September 30,

Six Months Ended
September 30,

2008

2007

2008

2007

Gross profit, as reported

$

164,153

$

154,712

$

327,750

$

313,257

Share-based compensation expense

2,053

1,493

3,678

3,083

Non-GAAP gross profit

$

166,206

$

156,205

$

331,428

$

316,340

Non-GAAP gross profit percentage

61.6

%

60.4

%

61.6

%

60.5

%

RECONCILIATION OF RESEARCH AND DEVELOPMENT EXPENSES TO NON-GAAP RESEARCH AND DEVELOPMENT EXPENSES

Three Months Ended
September 30,

Six Months Ended
September 30,

2008

2007

2008

2007

Research and development expenses, as reported

$

31,343

$

29,306

$

62,895

$

59,052

Share-based compensation expense

(2,640

)

(2,509

)

(5,075

)

(5,095

)

Non-GAAP research and development expenses

$

28,703

$

26,797

$

57,820

$

53,957

Non-GAAP research and development expenses as a percentage of net sales

10.6

%

10.4

%

10.7

%

10.3

%

RECONCILIATION OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES TO NON-GAAP SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Three Months Ended
September 30,

Six Months Ended
September 30,

2008

2007

2008

2007

Selling, general and administrative expenses, as reported

$

45,629

$

42,969

$

91,042

$

86,749

Share-based compensation expense

(3,800

)

(3,769

)

(7,439

)

(7,626

)

Non-GAAP selling, general and administrative expenses

$

41,829

$

39,200

$

83,603

$

79,123

Non-GAAP selling, general and administrative expenses as a percentage of net sales

15.5

%

15.2

%

15.5

%

15.1

%

RECONCILIATION OF OPERATING INCOME TO NON-GAAP OPERATING INCOME

Three Months Ended
September 30,

Six Months Ended
September 30,

2008

2007

2008

2007

Operating income, as reported

$

87,181

$

55,674

$

173,813

$

140,693

Share-based compensation expense

8,493

7,771

16,192

15,804

Special charge – sale of Fab 3

-

26,763

-

26,763

Non-GAAP operating income

$

95,674

$

90,208

$

190,005

$

183,260

Non-GAAP operating income as a percentage of net sales

35.5

%

34.9

%

35.3

%

35.1

%

RECONCILIATION OF NET INCOME AND DILUTED NET INCOME PER SHARE TO NON-GAAP NET INCOME AND NON-GAAP DILUTED NET INCOME PER SHARE